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It involves thousands of unique coded microdots being embedded into the animal's fleece.
Designers claim it makes it easy to identify an animal as stolen and trace the farm it came from.
Agricultural insurer NFU Mutual believes the cost to the UK of livestock rustling is about Â£2.9m a year.
Read more about this and other stories from across Yorkshire
TecTracer is being trialled on a sheep farm on the North York Moors near Whitby.
If successful, the company behind it, which has worked with North Yorkshire Police on the design, hopes to roll it out across the region.
Simon Clapcot, a PCSO with North Yorkshire's rural task force, said it offered a modern answer to older systems such as tagging sheep.
"Tags can be cut out and replaced giving the sheep a new identity but this remains on the fleece close to the skin and even shearing doesn't remove it."
The new system has been developed by York-based Trace-in-Metal.
If an animal is stolen, the system can alert the police, other farms, abattoirs and livestock auctions.

A system which might cut the number of sheep being stolen from farms is being tested in North Yorkshire.